If you’re working with Medicare beneficiaries whose income is above a certain level, they will have to pay a surcharge on their Parts B and D premiums, known as the Medicare Income-Related Monthly Adjustment Amount (IRMAA). These surcharges are determined by the Social Security Administration; beneficiaries will receive a predetermination notice in the mail showing how it was calculated. Being hit with an IRMAA can be overwhelming for many clients, especially for those living on a fixed income, but what some beneficiaries are unaware of is that they can avoid these extra charges. One way that you can help your Medicare clients save some money is by understanding how Medicare’s IRMAA affects them, as well as by helping them avoid surcharges.
The income used to determine the IRMAA surcharge is the MAGI, or modified adjusted gross income, plus bond interest, from 2 years ago, meaning beneficiaries’ 2020 income will determine their IRMAA in 2022. So, if your client reports a higher MAGI in 2020, they will face the surcharge once the IRMAA brackets are released.
The Consumer Price index for Urban Consumers (CPI-U)
The good news for your clients is that legislation was passed in 2020 that will allow IRMAA brackets to be indexed to the consumer price index for urban consumers, or CPI-U, which means they will need to have a higher MAGI than in previous years to face the surcharges. The MAGIs for 2021 are $88,000 for individual filers, and $176,000 for joint filers, compared to 2020’s $87,000 for individuals and $174,000 for joint filers.
With all that being said, it’s important to make clear to your clients that they shouldn’t overspend at the beginning of their retirement, because the IRMAA surcharges are calculated based on a 2-year look-back period. So, even if their income drops significantly, they will still face these surcharges based on their income from previous years.
Considering Roth Conversions
If your client has an IRA, point out to them that, with a traditional IRA, there is a required minimum distribution (RMD) that has to be withdrawn at retirement age, but they can convert their IRA into a Roth IRA through a Roth conversion. Doing this will mean they will have to pay more in taxes and IRMAA surcharges for a short period, but will ultimately help them avoid being bumped into a higher IRMAA bracket later on, especially if they expect to report a higher income after withdrawing the RMD from their retirement accounts.
Giving To Charities
If your client has a risk of being charged higher surcharges after withdrawing their RMD, they can choose to donate some of that money to charity; this donation is then considered taxable income, meaning they will avoid an increase in their MAGI, or being bumped up to a higher IRMAA bracket.
Considering Tax-Free Income
If your clients need extra money for living expenses, there are ways they can get extra income without the IRMAA surcharges: for example, they can opt for a reverse mortgage, or a home equity conversion mortgage. Another way to get tax-free income is by purchasing a life insurance policy with cash value; they can withdraw the cash value tax-free, which will help them avoid the IRMAA surcharges.
Appealing The Assessment
If your client’s income 2 years ago was higher because they were working and now their income is lower because they have retired, or if there is an error in the IRS data, they can appeal their IRMAA assessment. There are also life-changing events that can make them eligible for an appeal, including:
- Death of a spouse
- Divorce or annulment
- Work reduction
- Work stoppage
- Loss of income from income-producing property
- Loss or reduction of certain kinds of pension income
As the Medicare AEP opens up, you can help your clients save money by signing them up for a Medicare Supplement Plan, but you can also help them save money in other ways, such as by steering them towards ways to avoid IRMAA surcharges. Your clients will thank you, and will spread the word about how you go above and beyond to help them save as much money as possible.